ITEM 1 - Condensed
Interim Financial Statements
Encision Inc.
Condensed Balance Sheets
(Unaudited)
|
|
December 31, 2020
|
|
March 31,
2020
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
854,194
|
|
|
$
|
385,132
|
|
Accounts receivable, net of allowance for doubtful accounts of $26,500 at December 31, 2020 and $58,000 at March 31, 2020
|
|
|
1,042,743
|
|
|
|
881,194
|
|
Inventories, net of reserve for obsolescence of $63,000 at December 31, 2020 and $39,000 at March 31, 2020
|
|
|
1,521,583
|
|
|
|
1,625,901
|
|
Prepaid expenses
|
|
|
179,202
|
|
|
|
72,639
|
|
Total current assets
|
|
|
3,597,722
|
|
|
|
2,964,866
|
|
Equipment, at cost:
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
2,582,022
|
|
|
|
3,130,640
|
|
Accumulated depreciation
|
|
|
(2,416,274
|
)
|
|
|
(2,923,482
|
)
|
Equipment, net
|
|
|
165,748
|
|
|
|
207,158
|
|
Right of use asset
|
|
|
1,127,319
|
|
|
|
1,317,057
|
|
Patents, net of accumulated amortization of $313,690 at December 31, 2020 and $291,337 at March 31, 2020
|
|
|
221,801
|
|
|
|
228,296
|
|
Other assets
|
|
|
20,495
|
|
|
|
19,548
|
|
TOTAL ASSETS
|
|
$
|
5,133,085
|
|
|
$
|
4,736,925
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
475,154
|
|
|
$
|
444,823
|
|
Line of credit
|
|
|
—
|
|
|
|
370,498
|
|
Accrued compensation
|
|
|
232,883
|
|
|
|
218,806
|
|
Other accrued liabilities
|
|
|
294,394
|
|
|
|
96,077
|
|
Accrued lease liability
|
|
|
295,627
|
|
|
|
278,271
|
|
Total current liabilities
|
|
|
1,298,058
|
|
|
|
1,408,475
|
|
Long-term liability:
|
|
|
|
|
|
|
|
|
Accrued lease liability, net of current portion
|
|
|
1,005,194
|
|
|
|
1,144,432
|
|
Economic injury disaster loan
|
|
|
152,000
|
|
|
|
—
|
|
Total liabilities
|
|
|
2,455,252
|
|
|
|
2,552,907
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock and additional paid-in capital, no par value: 100,000,000 shares authorized; 11,582,641 shares issued and outstanding at December 31, 2020 and March 31, 2020
|
|
|
24,257,491
|
|
|
|
24,232,477
|
|
Accumulated (deficit)
|
|
|
(21,579,658
|
)
|
|
|
(22,048,459
|
)
|
Total shareholders’ equity
|
|
|
2,677,833
|
|
|
|
2,184,018
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
5,133,085
|
|
|
$
|
4,736,925
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
Encision Inc.
Condensed Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
NET REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,998,979
|
|
|
$
|
2,038,925
|
|
|
$
|
5,093,118
|
|
|
$
|
5,891,934
|
|
Service
|
|
|
163,621
|
|
|
|
—
|
|
|
|
297,457
|
|
|
|
—
|
|
Total revenue
|
|
|
2,162,600
|
|
|
|
2,038,925
|
|
|
|
5,390,575
|
|
|
|
5,891,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
975,581
|
|
|
|
955,520
|
|
|
|
2,500,310
|
|
|
|
2,826,563
|
|
Service
|
|
|
81,421
|
|
|
|
—
|
|
|
|
150,197
|
|
|
|
—
|
|
Total cost of revenue
|
|
|
1,057,002
|
|
|
|
955,520
|
|
|
|
2,650,507
|
|
|
|
2,826,563
|
|
GROSS PROFIT
|
|
|
1,105,598
|
|
|
|
1,083,405
|
|
|
|
2,740,068
|
|
|
|
3,065,371
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
580,477
|
|
|
|
544,495
|
|
|
|
1,512,741
|
|
|
|
1,611,996
|
|
General and administrative
|
|
|
372,994
|
|
|
|
293,806
|
|
|
|
998,620
|
|
|
|
943,600
|
|
Research and development
|
|
|
139,390
|
|
|
|
158,942
|
|
|
|
443,452
|
|
|
|
567,754
|
|
Total operating expenses
|
|
|
1,092,861
|
|
|
|
997,243
|
|
|
|
2,954,813
|
|
|
|
3,123,350
|
|
OPERATING INCOME (LOSS)
|
|
|
12,737
|
|
|
|
86,162
|
|
|
|
(214,745
|
)
|
|
|
(57,979
|
)
|
Interest expense, net
|
|
|
(16,380
|
)
|
|
|
(16,172
|
)
|
|
|
(51,021
|
)
|
|
|
(25,167
|
)
|
Extinguishment of debt income
|
|
|
598,567
|
|
|
|
—
|
|
|
|
598,567
|
|
|
|
—
|
|
Other income, net
|
|
|
4,397
|
|
|
|
113
|
|
|
|
136,000
|
|
|
|
1,241
|
|
Interest expense, extinguishment of debt income and other income, net
|
|
|
586,584
|
|
|
|
(16,059
|
)
|
|
|
683,546
|
|
|
|
(23,926
|
)
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
599,321
|
|
|
|
70,103
|
|
|
|
468,801
|
|
|
|
(81,905
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
$
|
599,321
|
|
|
$
|
70,103
|
|
|
$
|
468,801
|
|
|
$
|
(81,905
|
)
|
Net income (loss) per share—basic and diluted
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Weighted average shares—basic
|
|
|
11,582,641
|
|
|
|
11,578,371
|
|
|
|
11,582,641
|
|
|
|
11,565,027
|
|
Weighted average shares—diluted
|
|
|
11,708,797
|
|
|
|
11,631,172
|
|
|
|
11,750,349
|
|
|
|
11,565,027
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
Encision Inc.
Condensed Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
468,801
|
|
|
$
|
(81,905
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Extinguishment of debt income
|
|
|
(598,567
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
67,907
|
|
|
|
111,623
|
|
Share-based compensation expense
|
|
|
25,014
|
|
|
|
22,015
|
|
(Recovery from) provision for doubtful accounts, net
|
|
|
(31,500
|
)
|
|
|
9,500
|
|
Provision for (recovery from) inventory obsolescence, net
|
|
|
24,000
|
|
|
|
(9,000
|
)
|
Other income from release of account payable
|
|
|
(56,435
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Right of use asset, net
|
|
|
67,856
|
|
|
|
30,170
|
|
Accounts receivable
|
|
|
(130,049
|
)
|
|
|
(59,086
|
)
|
Inventories
|
|
|
80,318
|
|
|
|
120,581
|
|
Prepaid expenses and other assets
|
|
|
(107,510
|
)
|
|
|
11,485
|
|
Accounts payable
|
|
|
86,766
|
|
|
|
(69,354
|
)
|
Accrued compensation and other accrued liabilities
|
|
|
212,394
|
|
|
|
(131,089
|
)
|
Net cash provided by (used in) operating activities
|
|
|
108,995
|
|
|
|
(45,060
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(4,144
|
)
|
|
|
(52,796
|
)
|
Patent costs
|
|
|
(15,858
|
)
|
|
|
(5,135
|
)
|
Net cash (used in) investing activities
|
|
|
(20,002
|
)
|
|
|
(57,931
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Paydown of credit facility, net change
|
|
|
(370,498
|
)
|
|
|
—
|
|
EIDL loan
|
|
|
152,000
|
|
|
|
—
|
|
Proceeds from PPP loan
|
|
|
598,567
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
380,069
|
|
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
469,062
|
|
|
|
(102,991
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
385,132
|
|
|
|
298,348
|
|
Cash and cash equivalents, end of period
|
|
$
|
854,194
|
|
|
$
|
195,357
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
$
|
1,127,319
|
|
|
$
|
1,555,150
|
|
Accrued lease liability
|
|
$
|
1,300,821
|
|
|
$
|
1,619,842
|
|
Interest paid
|
|
$
|
51,021
|
|
|
$
|
18,502
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
ENCISION INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Unaudited)
Note 1. ORGANIZATION AND NATURE OF BUSINESS
Encision Inc. is a medical device company that
designs, develops, manufactures and markets patented surgical instruments that provide greater safety to, and saves lives of, patients
undergoing minimally-invasive surgery. We believe that our patented AEM® (Active Electrode Monitoring) surgical
instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a patient
safety risk in laparoscopic surgery. Our sales to date have been made principally in the United States.
We have an accumulated deficit of $21,579,658
at December 31, 2020. A significant portion of our operating funds have been provided by issuances of our common stock and warrants,
a line of credit, and the exercise of stock options to purchase our common stock. Shareholders’ equity increased by $493,815
since March 31,2020 as a result of our income of $468,801 and share-based compensation of $25,014. Should our liquidity be diminished
in the future because of operating losses, we may be required to seek additional capital.
Our strategic marketing and sales plan is designed
to expand the use of our products in surgically active hospitals and surgery centers in the United States.
We have been actively monitoring the novel
coronavirus (“COVID-19”) situation and its impact globally. Our production facilities continued to operate during the
year as they had prior to the COVID-19 pandemic with minimal change, other than for enhanced safety measures intended to prevent
the spread of the virus. The remote working arrangements and travel restrictions imposed by various governments had limited impact
on our ability to maintain operations during the year, as our manufacturing operations have generally been exempted from stay-at-home
orders. However, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of
factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, our
ability and our customers to maintain operations, continued access to transportation resources, the changing needs and priorities
of customers, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic.
We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve
our customers and patients worldwide.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The condensed
interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles accepted in the United States (“GAAP”)
have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate
to make the information presented not misleading. The condensed interim financial statements and notes thereto should be read in
conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2020, filed on June 12, 2020.
The accompanying condensed interim financial
statements have been prepared, in all material respects, in conformity with the standards of accounting measurements and reflect,
in the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for
such periods in accordance with GAAP. All adjustments are of a normal recurring nature. The results of operations for the most
recent interim period are not necessarily indicative of the results to be expected for the full year.
Use of Estimates in the Preparation of Financial
Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents. For purposes
of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments.
Our financial instruments consist of cash, cash equivalents, short-term trade receivables, payables, line of credit and Economic
Injury Disaster Loan (“EIDL”) loan. The carrying values of cash, cash equivalents, trade receivables, payables, line
of credit approximate their fair value due to their short maturities.The fair values of the EIDL Loan approximates the carrying
value based on estimated discounted future cash flows using the current rates at which similar loans would be made.
Concentration of Credit Risk. Financial
instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, accounts receivable
line of credit and unsecured promissory note. From time to time, the amount of cash on deposit with financial institutions may
exceed the $250,000 federally insured limit at December 31, 2020. We believe that cash on deposit that exceeds $250,000 with financial
institutions is financially sound and the risk of loss is minimal.
We have no significant off-balance sheet concentrations
of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority
of our cash balances with one financial institution in the form of demand deposits.
Accounts receivable are typically unsecured
and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly,
we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make required payments. The net accounts receivable balance
at December 31, 2020 of $1,042,743 and at March 31, 2020 of $881,194 included no more than 8% from any one customer.
Inventories. Inventories are stated
at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable
inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required. At December 31, 2020 and March 31, 2020, inventory consisted of the following:
|
|
December
31, 2020
|
|
March 31, 2020
|
Raw materials
|
|
$
|
1,211,805
|
|
|
$
|
1,147,983
|
|
Finished goods
|
|
|
372,778
|
|
|
|
516,918
|
|
Total gross inventories
|
|
|
1,584,583
|
|
|
|
1,664,901
|
|
Less reserve for obsolescence
|
|
|
(63,000
|
)
|
|
|
(39,000
|
)
|
Total net inventories
|
|
$
|
1,521,583
|
|
|
$
|
1,625,901
|
|
Property and Equipment. Property and
equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven
years. Depreciation expense for the three and nine months ended December 31, 2020 was $13,277 and $45,554, respectively, and for
the three and nine months ended December 31, 2019 was $24,924 and $91,646, respectively. We use the straight-line method of depreciation
for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated
useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are
capitalized.
Long-Lived Assets. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and
without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced
to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated
fair value less cost to sell.
Patents. The costs of applying for patents
are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from
the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying
value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion
that the recorded amounts have been impaired.
Income Taxes. We account for income
taxes under the provisions of FASB Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income
Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected
future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases
of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits, which, more likely than not based on current circumstances,
are not expected to be realized. As a result, no provision for income tax is reflected in the accompanying statements of operations.
Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should
be reversed. We are required to make many subjective assumptions and judgments regarding our income tax exposures. At December
31, 2020, we had no unrecognized tax benefits, which would affect the effective tax rate if recognized and had no accrued interest,
or penalties related to uncertain tax positions.
Revenue Recognition. We record revenue
at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue
to apply our current business processes, policies, systems and controls to support recognition and disclosure. Our shipping policy
is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for
normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty obligations. As presented
on the Statement of Operations our revenue is disaggregated between product revenue and service revenue. As it relates specifically
to product revenue, we do not believe further disaggregation is necessary as substantially all of our product revenue comes from
multiple products within a line of medical devices. Our engineering service contracts are billed on a time and materials basis
and revenue is recognized over time as the services are performed.
Research and Development Expenses. We
expense research and development costs for products and processes as incurred.
Stock-Based Compensation. Stock-based
compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation”
(“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense over the requisite service periods in our statements of operations.
Stock-based compensation expense recognized
under ASC 718 for the three and nine months ended December 31, 2020 was $8,483 and $25,014, respectively, and the three and nine
months ended December 31, 2019 was $6,650 and $22,015, respectively, which consisted of stock-based compensation expense related
to grants of employee stock options.
Segment Reporting. We have concluded
that we have two operating segments, product and service. Product designs, develops, manufactures and markets patented surgical
instruments. Service performs electrical engineering activities for external entities.
|
|
Three Months Ended
December 31, 2020
|
|
Nine Months Ended
December 31, 2020
|
|
|
Product
|
|
Service
|
|
Total
|
|
Product
|
|
Service
|
|
Total
|
Net revenue
|
|
$
|
1,998,979
|
|
|
$
|
163,621
|
|
|
$
|
2,162,600
|
|
|
$
|
5,093,118
|
|
|
$
|
297,457
|
|
|
$
|
5,390,575
|
|
Cost of revenue
|
|
|
975,581
|
|
|
|
81,421
|
|
|
|
1,057,002
|
|
|
|
2,500,310
|
|
|
|
150,197
|
|
|
|
2,650,507
|
|
Gross profit
|
|
|
1,023,398
|
|
|
|
82,200
|
|
|
|
1,105,598
|
|
|
|
2,592,808
|
|
|
|
147,260
|
|
|
|
2,740,068
|
|
Operating income (loss)
|
|
|
(69,463
|
)
|
|
|
82,200
|
|
|
|
12,737
|
|
|
|
(362,005
|
)
|
|
|
147,260
|
|
|
|
(214,745
|
)
|
Depreciation and amortization
|
|
|
20,584
|
|
|
|
—
|
|
|
|
20,584
|
|
|
|
67,907
|
|
|
|
—
|
|
|
|
67,907
|
|
Capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,144
|
|
|
|
—
|
|
|
|
4,144
|
|
Equipment and patents, net
|
|
$
|
387,549
|
|
|
$
|
—
|
|
|
$
|
387,549
|
|
|
$
|
387,549
|
|
|
$
|
—
|
|
|
$
|
387,549
|
|
Recently Issued Accounting Pronouncements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 adds
a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than
incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings
as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, excluding
smaller reporting entities, which will be effective for fiscal years beginning after December 15, 2022. We will adopt ASU 2016-13
beginning April 1, 2023 and does not expect the application of the CECL impairment model to have a significant impact on our allowance
for uncollectible amounts for accounts receivable.
Note 3. Basic
and Diluted Income and Loss per Common Share
We report both basic and diluted net income
(loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted
average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing
the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the
period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common
shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for
the period.
The following table presents the calculation
of basic and diluted net loss per share:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
Net income (loss)
|
|
$
|
599,321
|
|
|
$
|
70,103
|
|
|
$
|
468,801
|
|
|
$
|
(81,905
|
)
|
Weighted-average basic shares outstanding
|
|
|
11,582,641
|
|
|
|
11,578,371
|
|
|
|
11,582,641
|
|
|
|
11,565,027
|
|
Effect of dilutive securities
|
|
|
126,156
|
|
|
|
52,801
|
|
|
|
167,708
|
|
|
|
—
|
|
Weighted-average diluted shares
|
|
|
11,708,797
|
|
|
|
11,631,172
|
|
|
|
11,750,349
|
|
|
|
11,565,027
|
|
Basic net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Antidilutive employee stock options
|
|
|
909,844
|
|
|
|
910,199
|
|
|
|
868,292
|
|
|
|
963,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. COMMITMENTS AND CONTINGENCIES
We have a noncancelable lease agreement for
our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees and lessors to increase transparency
and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as either finance or
operating leases under previous accounting standards and disclosing key information about leasing arrangements. We adopted Topic
842 on April 1, 2019, using the alternative modified transition method, which requires a cumulative effect adjustment, if any,
to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was
no cumulative effect adjustment recorded on April 1, 2019. The primary impact for us was the balance sheet recognition of right-of-use
(“ROU”) assets and lease liabilities for operating leases as a lessee.
We determine if an arrangement contains a lease
at inception. We currently do not have any finance leases. Operating lease ROU assets and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include
any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received.
We use our incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities
as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line basis over the lease term.
The minimum future lease payment, by fiscal
year, as of December 31, 2020 is as follows:
Fiscal Year
|
|
Amount
|
|
2021
|
|
|
$
|
87,000
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
232,139
|
|
|
Total
|
|
|
$
|
1,435,640
|
|
On August 9, 2019, we
entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial covenants and is secured
by all of our assets. Under the agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000
or 85% of eligible accounts receivable. The interest rate is prime rate (3.25% at December 31, 2020) plus 1.5%, with a floor of
6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan
balance of $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively.
At December 31, 2020, we had no borrowings and $535,799 available to borrow under our line of credit. During January 2021, we canceled
our relationship with Crestmark Bank. We had no borrowings and incurred a $20,000 exit fee.
On April 17, 2020, we entered into an unsecured
promissory note under the Paycheck Protection Program (the “PPP”) for a principal amount of $598,567. The PPP was established
under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the
terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted under
the PPP. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs, and
the maintenance of employee and compensation levels. In the quarter that ended December 31, 2020, we achieved the requirements
for forgiveness, and all of the $598,567 was forgiven. We recognized the forgiveness as extinguishment of debt income of $598,567.
On August 4, 2020, we received $150,000 in
loan funding from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”)
program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note,
dated August 1, 2020 in the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest
accrues on the outstanding principal at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable
sooner upon an event of default under the Note. Under the Note, we will be obligated to make equal monthly payments of principal
and interest of $731 beginning on August 1, 2021 through the maturity date of August 1, 2050. The Note may be prepaid in part or
in full, at any time, without penalty.
The minimum future EIDL payment, by fiscal
year, as of December 31, 2020 is as follows:
Fiscal Year
|
|
Amount
|
|
2021
|
|
|
$
|
—
|
|
|
2022
|
|
|
|
1,997
|
|
|
2023
|
|
|
|
3,091
|
|
|
2024
|
|
|
|
3,208
|
|
|
2025
|
|
|
|
3,331
|
|
|
Thereafter
|
|
|
|
140,373
|
|
|
Total
|
|
|
$
|
152,000
|
|
Aside from the operating lease and EIDL loan,
we do not have any material contractual commitments requiring settlement in the future.
We are subject to regulation by the United
States Food and Drug Administration (“FDA”). The FDA provides regulations governing the manufacture and sale of our
products and regularly inspects us and other manufacturers to determine compliance with these regulations. We believe that we were
in substantial compliance with all known regulations at December 31, 2020. FDA inspections are conducted periodically at the discretion
of the FDA. Our latest inspection by the FDA occurred in October 2019.
Note 5. SHARE-BASED COMPENSATION
The provisions of ASC 718-10-55 requires the
measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including
employee stock options and RSUs, based on estimated fair values. The following table summarizes stock-based compensation expense
related to employee stock options for the three and nine months ended December 31, 2020 and 2019, which was allocated as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
Cost of sales
|
|
$
|
917
|
|
|
$
|
703
|
|
|
$
|
2,751
|
|
|
$
|
2,108
|
|
Sales and marketing
|
|
|
1,218
|
|
|
|
796
|
|
|
|
3,653
|
|
|
|
2,389
|
|
General and administrative
|
|
|
5,803
|
|
|
|
5,064
|
|
|
|
16,974
|
|
|
|
16,128
|
|
Research and development
|
|
|
545
|
|
|
|
87
|
|
|
|
1,636
|
|
|
|
1,390
|
|
Stock-based compensation expense
|
|
$
|
8,483
|
|
|
$
|
6,650
|
|
|
$
|
25,014
|
|
|
$
|
22,015
|
|
Share-based compensation cost for stock options
is measured at the grant date, based on the fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing
model. The BSM option-pricing model requires the use of actual employee exercise behavior data and the application of a number
of assumptions, including expected volatility, risk-free interest rate and expected dividends. There were 20,000 stock options
granted and 60,000 stock options forfeited during the three months ended December 31, 2020, and 110,000 stock options granted and
72,000 stock options forfeited during the nine months ended December 31, 2020. There were 25,000 stock options granted and 5,000
stock options and 24,286 RSUs were forfeited during the three months ended December 31, 2019, and 110,000 stock options granted
and 88,000 stock options and 24,286 RSUs forfeited during the nine months ended December 31, 2019.
As of December 31, 2020, approximately $109,000
of total unrecognized compensation costs related to nonvested stock options is expected to be recognized over a period of five
years.
Note 6. RELATED PARTY TRANSACTION
We paid consulting fees of $16,000 and $45,103
during the three and nine months ended December 31, 2020, respectively, and $16,813 and $53,407 to an entity owned by one of our
directors during the three and nine months ended December 31, 2019, respectively.
Note 7. SUBSEQUENT EVENTS
Except for the items
below, we evaluated all of our activity as of the date the condensed interim financial statements were issued and concluded that
no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our
condensed interim financial statements.
During January 2021,
we canceled our relationship with Crestmark Bank. We had no borrowings and incurred a $20,000 exit fee.
During January 2021,
we entered into a note agreement with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds
were used to purchase equipment. The note is secured by the equipment.
On February 8, 2021, we entered into an unsecured
promissory note under the PPP for a principal amount of $533,118. The PPP was established under the Consolidated Appropriations
Act of 2021, enacted December 27, 2020.
ITEM 2 - MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this section
on Management’s Discussion and Analysis are not historical facts, including statements about our strategies and expectations
with respect to new and existing products, market demand, acceptance of new and existing products, marketing efforts, technologies
and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are
forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve substantial risks
and uncertainties that may cause actual results to differ materially from those indicated by the forward looking statements. All
forward looking statements in this section on Management’s Discussion and Analysis are based on information available to
us on the date of this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q
are strongly encouraged to review the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended
March 31, 2020.
General
Encision Inc., a medical device company based
in Boulder, Colorado, has developed and markets innovative technology that provides unprecedented outcomes and patient safety in
minimally-invasive surgery. We believe that our patented Active Electrode Monitoring (“AEM®”) AEM EndoShield™
Burn Protection System is changing the marketplace for electrosurgical devices and laparoscopic instruments by providing a solution
to a well-documented hazard unique to laparoscopic surgery. The Center for Medicare and Medicaid Services has published its Hospital-Acquired
Condition Reduction Program. The program has begun to levy as much as a 1% penalty on Medicare reimbursements to hospitals in the
lower quadrant of performance for selected quality indicators, including accidental puncture and laceration (“APL”).
Examples of APL include the use of a cautery device (electrosurgery) or scissors to dissect a tissue plane that errantly causes
an injury to underlying bowels. A Safety Communication was released by the FDA on May 29, 2018. It is on the FDA's website at:
https://www.fda.gov/MedicalDevices/Safety/AlertsandNotices/ucm608637.htm. The Safety Communication states that, "In addition
to serving as an ignition source, monopolar energy use can directly result in unintended patient burns from capacitive coupling
and intra-operative insulation failure. If a monopolar electrosurgical unit (“ESU”) is used: Do not activate when near
or in contact with other instruments.”
We address market opportunities created by
the increase in minimally-invasive surgery (“MIS”) and surgeons’ use of electrosurgery devices in these procedures.
The product opportunity exists in that monopolar electrosurgery instruments used in laparoscopic procedures provide excellent clinical
results, but are also susceptible to causing inadvertent collateral tissue damage outside the surgeon’s field of view due
to insulation failure and capacitive coupling. The risk of unintended electrosurgical burn injury to the patient in laparoscopic
surgery has been well documented. This risk poses a threat to patient safety, including the risk of death, and creates liability
exposure for surgeons and hospitals, as well as increased and preventable readmissions.
Our patented AEM technology provides surgeons
with the desired tissue effects, while capturing stray electrosurgical energy that can cause unintended and unseen tissue injury
that may result in death. AEM Surgical Instruments are equivalent to conventional instruments in size, shape, ergonomics, functionality
and competitive pricing, but they incorporate “Active Electrode Monitoring” technology to dynamically and continuously
monitor the flow of electrosurgical current, thereby helping to prevent patient injury. With our “shielded and monitored”
instruments, surgeons are able to perform electrosurgical procedures more safely, effectively and economically than is possible
using conventional instruments or alternative energy sources.
AEM technology has been recommended and endorsed
by many groups involved in MIS. Surgeons, nurses, biomedical engineers, the medicolegal community, malpractice insurance carriers
and electrosurgical device manufacturers advocate the use of AEM technology. We have focused our marketing strategies to date on
expanding the market awareness of the AEM technology and our broad independent endorsements and have continued efforts to improve
and expand the AEM technology penetration.
When a hospital or surgery center changes to
AEM technology, we receive recurring revenue from sales of replacement instruments. We believe that there is no directly competing
technology to supplant AEM products. The replacement market of reusable and disposable AEM products in hospitals and surgery centers
that use our AEM technology represented over 90% of our product revenue during the three and nine months ended December 31, 2020.
This revenue stream is expected to grow as the base of accounts using AEM technology expands. In addition, we intend to further
develop disposable versions of more of our AEM products in order to meet market demands and expand our sales opportunities.
We have an accumulated deficit of $21,579,658
at December 31, 2020. A significant portion of our operating funds have been provided by issuances of our common stock and warrants,
a line of credit, and the exercise of stock options to purchase our common stock. Should our liquidity be diminished in the future
because of operating losses, we may be required to seek additional capital.
During the nine months ended December 31, 2020,
we generated $108,995 of cash in our operating activities and used $4,144 for investments in property and equipment. As of December
31, 2020, we had $854,194 in cash and cash equivalents available to fund future operations, an increase of $469,062 from March
31, 2020. Our working capital was $2,299,664 at December 31, 2020 compared to $1,556,391 at March 31, 2020. The increase to working
capital was principally the result of obtaining a PPP loan.
Historical Perspective
We were
organized in 1991 and spent several years developing the AEM monitoring system and protective sheaths to adapt to conventional
electrosurgical instruments. We have invested heavily in an effort to protect our valuable technology, and, as a result of this
effort, we have been issued 16 unexpired relevant patents that together form a significant intellectual property position. Our
patents relate to the basic shielding and monitoring technologies that we incorporate into our AEM products.
Our AEM
Surgical Instruments have been engineered to provide a seamless transition for surgeons switching from conventional laparoscopic
instruments. AEM technology has been integrated into instruments that have the same look, feel and functionality as conventional
instruments that surgeons have been using for years. The AEM product line encompasses the full range of instrument sizes, types
and styles favored by surgeons. Additionally, we continue to improve quality and add to the product line. These additions include
more disposable versions, the introduction of hand-activated instruments, our enhanced scissors, our eEdge™ scissors, our
EM3 AEM Monitor, our AEM EndoShield Burn Protection System and the recent introduction of our AEM 2X enTouch® Scissors. Hospitals
can make a complete and smooth conversion to our product line, thereby advancing patient safety in MIS with optimal convenience.
Outlook
Installed Base of AEM Monitoring Equipment:
We believe that sales of our installed base of AEM products will increase as the inherent risks associated with monopolar laparoscopic
electrosurgery become more widely acknowledged and as we focus on increasing our sales efficiency and continue to enhance our product
line. We expect that the replacement sales of electrosurgical instruments and accessories will also increase as additional facilities
adopt AEM technology. We anticipate that the efforts to improve the productivity of sales representatives carrying the AEM product
line, along with the introduction of next generation products, may provide the basis for increased sales and profitable operations.
However, these measures, or any others that we may adopt, may not result in either increased sales or profitable operations.
We believe that the unique performance of the
AEM technology and our breadth of independent endorsements provide an opportunity for continued market share growth. In our view,
market awareness and awareness of the clinical credibility of the AEM technology, as well as awareness of our endorsements, are
improving, and we expect this awareness to benefit our sales efforts for the remainder of fiscal year 2021. Our objectives for
the remainder of fiscal year 2021 are to optimize sales execution, to expand market awareness of the AEM technology and to maximize
the number of additional hospital and surgery center accounts switching to AEM instruments while retaining existing customers.
In addition, acceptance of AEM products depends on surgeons’ preference for our instruments, which depends on factors such
as ergonomics, quality and ease of use in addition to the technological and safety advantages of AEM products. If surgeons prefer
other instruments to our instruments, our business results will suffer.
We have been actively monitoring the COVID-19
situation and its impact. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team
members and their families and continue to support patients. Our production facility continued to operate during the year as it
had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread
of the virus. Our capital and financial resources, including overall liquidity, remain strong. The remote working arrangements
and travel restrictions imposed by various governments had limited impact on our ability to maintain operations during the year,
as our manufacturing operation has generally been exempted from stay-at-home orders. However, we cannot predict the impact of the
progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our
employees, the ability of suppliers to continue to operate and deliver, our ability and our customers to maintain operations, continued
access to transportation resources, the changing needs and priorities of customers, any further government and/or public actions
taken in response to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID-19 pandemic
in order to ensure the safety of our people and our ability to serve our customers and patients worldwide.
We have entered into a Master Services Agreement
with Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies.
Under the agreement, we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris
Health for advanced surgical applications. This work is ongoing.
Possibility of Operating Losses: We
have an accumulated deficit of $21,579,658 at December 31, 2020. A significant portion of our operating funds have been provided
by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock.
Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital. We
have made strides toward improving our operating results but due to the ongoing need to develop, optimize and train our direct
sales managers and the independent sales representative network, the need to support the development of refinements to our product
line, and the need to increase sustained sales to a level adequate to cover fixed and variable operating costs, we may operate
at a net loss. Sustained losses, or our inability to generate sufficient cash flow from operations to fund our obligations, may
result in a need to raise additional capital.
Revenue Growth: We expect to generate
increased product revenue in the U.S. from sales to new customers and from expanded sales to existing customers as the medical
device industry stabilizes and our network of direct and independent sales representatives becomes more efficient. We believe that
the visibility and credibility of the independent clinical endorsements for AEM technology will contribute to new accounts and
increased product revenue in fiscal year 2021. We also expect to increase market share
through promotional programs of placing our AEM monitors at no charge into hospitals that commit to standardize with AEM instruments.
However, all of these efforts to increase market share and grow product revenue will depend in part on our ability to expand the
efficiency and effective coverage range of our direct and independent sales representatives, as well as maintain and in some cases,
improve the quality of our product offerings. The omission or delay of elective surgeries would negatively impact the extent and
timing of revenue growth. Service revenue represents design, development and product supply revenue from our agreements with strategic
partners.
We also have longer-term initiatives in place
to improve our prospects. We expect that development of next generation versions of our AEM products will better position our products
in the marketplace and improve our retention rate at hospitals and surgery centers that have changed to AEM technology, enabling
us to grow our sales. We are exploring overseas markets to assess opportunities for sales
growth internationally. Finally, we intend to explore opportunities to capitalize on our proven AEM technology via licensing
arrangements and strategic alliances. These efforts to generate additional sales and further the market penetration of our products
are longer term in nature and may not materialize. Even if we are able to successfully develop next generation products or identify
potential international markets or strategic partners, we may not be able to capitalize on these opportunities.
Gross Profit and Gross Margins: Gross
profit and gross margins can be expected to fluctuate from quarter to quarter as a result of product sales mix, sales volume and
service revenue. Gross margins on products manufactured or assembled by us are expected to improve at higher levels of production
and sales.
Sales and Marketing Expenses: We continue
to refine our domestic and international distribution capability, and we believe that sales
and marketing expenses will decrease as a percentage of net sales with increasing sales volume.
Research and Development Expenses: Research
and development expenses are expected to increase to support quality improvement efforts and development of refinements to our
AEM product line and new products, which will further expand options for surgeons and hospitals.
Results of Operations
For the quarter ended December 31, 2020
compared to the quarter ended December 31, 2019.
Net
Product revenue. Net product revenue for the quarter ended December 31, 2020 was $1,998,979 compared to $2,038,925 for the
quarter ended December 31, 2019, a decrease of 2%. The decrease of AEM product net revenue is attributable to business lost from
hospitals that used AEM technology during the quarter. Product revenue for the quarter
ended December 31, 2020 decreased primarily as a result of the decrease in non-essential surgical procedures performed during this
period due to the COVID-19 pandemic.
Net
Service revenue. Net service revenue for the quarter ended December 31, 2020 was $163,621 compared to none for the quarter
ended December 31, 2019. Net service revenue was for engineering services performed under a Master Services Agreement with Auris
Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement,
we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical
applications. The engineering services are ongoing.
Gross
profit. Gross profit for the quarter ended December 31, 2020 of $1,105,598 represented an increase of 2% from gross profit
of $1,083,405 for the quarter ended December 31, 2019. Gross profit increased in line with increased revenue. Gross profit as a
percentage of sales (gross margins) was 51% for the quarter ended December 31, 2020 and 53% for the quarter ended December 31,
2019. The gross margin decrease from last year’s quarter was primarily the result of fewer units of product produced, thereby
resulting in a higher labor and overhead cost per unit.
Sales and marketing expenses. Sales
and marketing expenses of $580,477 for the quarter ended December 31, 2020 represented an increase of 7% from sales and marketing
expenses of $544,495 for the quarter ended December 31, 2019. The increase was the result
of higher compensation and sales samples for the recent introduction of our AEM 2X enTouch® scissors.
General and administrative expenses.
General and administrative expenses of $372,994 for the quarter ended December 31, 2020 represented an increase of 27% from general
and administrative expenses of $293,806 for the quarter ended December 31, 2019. The
increase was the result of an increase to compensation and accrual for bonuses.
Research and development expenses. Research
and development expenses of $139,390 for the quarter ended December 31, 2020 represented
a decrease of 12% compared to $158,942 for the quarter ended December 31, 2019. The decrease was the result of an allocation of
expenses from research and development resources to the Auris Health project.
Other income, net. Other income, net
of $586,584 for the quarter ended December 31, 2020 included extinguishment of debt
income of $598,567.
Net income. Net income was $599,321
for the quarter ended December 31, 2020 compared to net income of $70,103 for the quarter ended December 31, 2019. The net income
increase was principally a result of extinguishment of debt income that related to the forgiveness of our PPP note.
For the nine months ended December 31, 2020
compared to the nine months ended December 31, 2019.
Net
Product revenue. Net product revenue for the nine months ended December 31, 2020 was $5,093,118 compared to $5,891,934 for
the nine months ended December 31, 2019, a decrease of 14%. The decrease of AEM product net revenue is attributable to business
lost from hospitals that used AEM technology during the nine months. Product revenue for the nine months ended December 31, 2020
decreased primarily as a result of the decrease in non-essential surgical procedures performed during this period due to the COVID-19
pandemic, especially in our first quarter.
Net Service revenue. Net service revenue
for the nine months ended December 31, 2020 was $297,457 compared to none for the nine months ended December 31, 2019. Net service
revenue was for engineering services performed under a Master Services Agreement with Auris Health, Inc. (“Auris Health”).
Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement, we will collaborate on the integration
of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical applications. The engineering services
are ongoing.
Gross profit.
Gross profit for the nine months ended December 31, 2020 of $2,740,068 represented a decrease of 11% from gross profit of $3,065,371
for the quarter ended December 31, 2019. Gross profit decreased in line with decreased revenue. Gross profit as a percentage of
sales (gross margins) was 51% for the nine months ended December 31, 2020 and 52% for the nine months ended December 31, 2019.
The gross margin decrease from last year’s nine months was primarily the result of fewer units of product produced, thereby
resulting in a higher labor and overhead cost per unit.
Sales and marketing expenses.
Sales and marketing expenses of $1,512,741 for the nine months ended December 31, 2020
represented a decrease of 6% from sales and marketing expenses of $1,611,996 for the nine
months ended December 31, 2019. The decrease was the result of lower trade shows, marketing
fees, advertising and travel.
General and administrative expenses.
General and administrative expenses of $998,620 for the nine months ended December
31, 2020 represented an increase of 6% from general and administrative expenses of $943,600 for the quarter ended
December 31, 2019. The increase was primarily the result of an accrual for bonuses.
Research and development expenses. Research
and development expenses of $443,452 for the nine months ended December
31, 2020 represented a decrease of 22% compared to $567,754 for the quarter ended December 31, 2019. The decrease was the
result of lower compensation and an allocation of expenses from research and development resources to the Auris Health project.
Other income, net. Other income, net
of $683,546 for the nine months ended December
31, 2020 included extinguishment of debt income of $598,567, a tariff refund of $75,161 and a non-cash reduction of accounts
payables of $56,435.
Net income. Net income was $468,801
for the nine months ended December 31, 2020 compared to net loss of $81,905 for the nine months ended December 31, 2019. The net
income increase was principally a result of lower total operating expenses and higher other income, primarily from the extinguishment
of our PPP note, and partially reduced by lower revenue and lower gross profit, as explained above.
The results of operations for the three and
nine months ended December 31, 2020 are not necessarily indicative of the results of operations for all or any part of the balance
of the fiscal year.
Liquidity and Capital Resources
To date, a significant portion of our operating
funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to
purchase our common stock. Common stock and additional paid in capital totaled $24,257,491 from inception through December 31,
2020.
On August 9, 2019, we
entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial covenants and is secured
by all of our assets. Under the agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000
or 85% of eligible accounts receivable. The interest rate is prime rate (3.25% at December 31, 2020) plus 1.5%, with a floor of
6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan
balance of $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively.
At December 31, 2020, we had no borrowings under our line of credit and $535,799 available to borrow under our line of credit.
During January 2021, we canceled our relationship with Crestmark Bank. We had no borrowings and incurred a $20,000 exit fee.
On April 17, 2020, we entered into an unsecured
promissory note under the PPP for a principal amount of $598,567. The PPP was established under the congressionally approved Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”). Under the terms of the CARES Act, a PPP loan recipient may
apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined
based upon the use of loan proceeds for payroll costs, rent and utility costs, and the maintenance of employee and compensation
levels. In the quarter that ended December 31, 2020, we achieved the requirements for forgiveness, and received notice from our
bank of such, and all of the $598,567 was forgiven. We recognized the forgiveness as extinguishment of debt income of $598,567.
On August 4, 2020, we received $150,000 in
loan funding from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”)
program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note,
dated August 1 in the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues
on the outstanding principal at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable sooner
upon an event of default under the Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest
of $731 beginning on August 1, 2021 through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at
any time, without penalty.
Our operations generated $108,995 of cash during
the nine months ended December 31, 2020 on net revenue of $5,390,575. Cash was principally
generated by net income. The amounts of cash generated by operations for the nine months ended December 31, 2020 are not necessarily
indicative of the expected amounts of cash to be generated from or used in operations in fiscal year 2021. At December 31, 2020,
we had $854,194 in cash and cash equivalents available to fund future operations. Our working capital was $2,299,664 at December
31, 2020 compared to $1,556,391 at March 31, 2020. The increase to working capital was principally the result of extinguishment
of debt and of obtaining a PPP loan. Current liabilities were $1,298,058 at December 31, 2020 compared to $1,408,475 at March 31,
2020. We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires
October 31, 2024.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency
and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases
under previous accounting standards and disclosing key information about leasing arrangements. The primary impact for us was the
balance sheet recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases as a lessee.
Operating lease ROU assets and operating lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement
date, less lease incentives received. We use our incremental borrowing rate based on the information available at the commencement
date in determining the lease liabilities as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line
basis over the lease term.
The minimum future lease payment, by fiscal
year, as of December 31, 2020 is as follows:
Fiscal Year
|
|
Amount
|
|
2021
|
|
|
$
|
87,000
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
232,139
|
|
|
Total
|
|
|
$
|
1,435,640
|
|
The minimum future EIDL payment, by fiscal
year, as of December 31, 2020 is as follows:
Fiscal Year
|
|
Amount
|
|
2021
|
|
|
$
|
—
|
|
|
2022
|
|
|
|
1,997
|
|
|
2023
|
|
|
|
3,091
|
|
|
2024
|
|
|
|
3,208
|
|
|
2025
|
|
|
|
3,331
|
|
|
Thereafter
|
|
|
|
140,373
|
|
|
Total
|
|
|
$
|
152,000
|
|
Aside from the operating lease and EIDL loan,
we do not have any material contractual commitments requiring settlement in the future.
As of December 31, 2020, the following table
shows our contractual obligations for the periods presented:
|
|
Payment due by period
|
Contractual obligations
|
|
Totals
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
Operating lease obligations
|
|
$
|
1,435,640
|
|
|
$
|
355,250
|
|
|
$
|
751,584
|
|
|
$
|
328,806
|
|
|
$
|
—
|
|
EIDL loan
|
|
|
152,000
|
|
|
|
2,000
|
|
|
|
6,034
|
|
|
|
6,660
|
|
|
|
137,306
|
|
Total
|
|
$
|
1,587,640
|
|
|
$
|
357,250
|
|
|
$
|
750,515
|
|
|
$
|
1,030,698
|
|
|
$
|
137,306
|
|
Our fiscal year 2021 operating plan is focused
on increasing new accounts, retaining existing customers, growing revenue, increasing gross profits and conserving cash. We are
investing in research and development efforts to develop next generation versions of the AEM product line. We have invested in
manufacturing property and equipment to manufacture disposable scissors inserts internally and to reduce our cost of product revenue.
We cannot predict with certainty the expected revenue, gross profit, net income or loss and usage of cash, cash equivalents or
restricted cash for fiscal year 2021. If we are unable to manage our business operations in line with budget expectations, it could
have a material adverse effect on our business viability, financial position, results of operations and cash flows.
Income
Taxes
As of March 31, 2020,
net operating loss carryforwards totaling approximately $8.2 million are available to reduce taxable income in the future. The
net operating loss carryforwards expire, if not previously utilized, at various dates beginning in the fiscal year ending March
31, 2021. We have not paid income taxes since our inception. The Tax Reform Act of 1986 and other income tax regulations contain
provisions which may limit the net operating loss carryforwards available to be used in any given year if certain events occur,
including changes in ownership interests. We have established a valuation allowance for the entire amount of our deferred tax asset
since inception due to our history of losses. Should we achieve sufficient, sustained income in the future, we may conclude that
some or all of the valuation allowance should be reversed. If some or all of the valuation allowance were reversed, then, to the
extent of the reversal, a tax benefit would be recognized which would result in an increase to net income.
Critical Accounting Policies and Estimates
Our discussion
and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, sales returns, contingencies and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of our financial statements.
We record revenue at a single point in time,
when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business
processes, policies, systems and controls to support recognition and disclosure. Our shipping policy is FOB Shipping Point. We
recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims.
We have no ongoing obligations related to product sales, except for normal warranty obligations. We evaluated the requirement to
disaggregate revenue, and concluded that substantially all of its revenue comes from multiple products within a line of medical
devices. Our engineering service contracts are billed on a time and materials basis and revenue is recognized over time as the
services are performed.
We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required, which would increase our expenses during the periods in which any such allowances were
made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will
be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates
prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of
the provision in the period of such determination.
We provide
for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of our component suppliers, we have experienced some costs
related to warranties. The warranty accrual is based on historical experience and is adjusted based on current experience. Should
actual warranty experience differ from our estimates, revisions to the estimated warranty liability would be required.
We reduce
inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated
realizable value based on assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce
our reported net income during the period in which such write-downs were applied. To the extent that our estimates prove to be
too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision
in the period of such determination.
We recognize deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial
reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance
for the amount of any tax benefits, which, more likely than not based on current circumstances, are not expected to be realized.
Should we maintain sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should
be reversed.
Property
and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven
years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated
over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as
incurred and major additions, replacements and improvements are capitalized.
We amortize
our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may
be required to adjust these useful lives of our patents based on advances in technology, competitor actions, and the like. We review
the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations
regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired,
with a corresponding charge against earnings.
We currently
estimate forfeitures for stock-based compensation expense related to employee stock options at 40% and evaluate the forfeiture
rate quarterly. Other assumptions that are used in calculating stock-based compensation expense include risk-free interest rate,
expected life, expected volatility and expected dividend.